On September 5, 2017, the Supreme Judicial Court heard arguments in Segal v. Johnson, a case that could have far-reaching consequences in both employment and corporate law in Massachusetts. The case concerns the potential for individual liability of corporate investors and directors under the Massachusetts Wage Act.
The plaintiff, Segal, was a co-founder and manager of a limited liability company that developed cancer treatments. The defendants, Johnson and Rose, were investors and board members of the company. Over time, the company struggled and was unable to meet its cash flow obligations and payroll. Johnson and Rose arranged for several “targeted loans” to pay certain employees. They did not do this for Segal, who alleged that he worked for the company for two years without pay. The company ultimately went into receivership and was liquidated.
Segal filed suit in the Massachusetts Superior Court against the company, Rose and Johnson. Though some of his claims were dismissed, the Massachusetts Appeals Court later allowed him to proceed against Johnson and Rose individually. The case went to trial in 2015, where a jury found Johnson and Rose individually liable to Segal for his wages for the full two year period. The judgment awarded to Segal, inclusive of treble damages under the Massachusetts Wage Act, interest and costs, exceeded two million dollars.
Segal and Johnson appealed directly to the Supreme Judicial Court. They claim that as directors and investors in the company, they are not subject to the individual liability provisions of the Wage Act. The case is likely to turn on the SJC’s interpretation of the Wage Act’s application of liability to individual “agents having the management of such corporation.” Johnson and Rose argued to the SJC that their roles (board members, investors) and activities (making targeted loans to the company) did not make them the company’s “agents” as that term is commonly understood. Segal contends that the defendants effectively controlled the company’s management, spending and its decision not to pay his wages, making them agents individually liable under the Wage Act.
At oral argument, the Justices’ questions indicated some concern about how their decision could affect participation in Massachusetts startups. The defendants characterized the Superior Court result as a “dramatic expansion” of individual Wage Act liability that jeopardizes individual investors, lenders and entrepreneurs across the state. The plaintiff downplayed this concern, arguing that the case is not nearly that far-reaching because the defendants controlled the management of the company and were not simply passive investors or board members.
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